UPDATE 2-Fitch warns it may cut U.S. credit rating from AAA

NEW YORK Oct 15 Fitch Ratings warned on Tuesday
it could cut the sovereign credit rating of the United States
from AAA, citing the political brinkmanship over raising the
federal debt ceiling.

"Although Fitch continues to believe that the debt ceiling
will be raised soon, the political brinkmanship and reduced
financing flexibility could increase the risk of a U.S.
default," the firm said in a statement.

The firm put its opinion about the creditworthiness of U.S.
government debt on what its calls Ratings Watch Negative, a
reflection of the increasing risk of a near-term default if the
debt limit is not raised in time. It gave itself until the end
of the first quarter of 2014 to decide whether it will actually
cut the rating.

Still, Fitch reaffirmed its belief that an agreement to
raise the debt ceiling will be reached, allowing the U.S.
government to pay its bills by borrowing beyond the $16.7
trillion limit currently in place.

Fitch is the only one of the three major credit rating
agencies to have a negative outlook on the U.S. sovereign
credit. Standard & Poor's downgraded the rating to AA-plus with
a stable outlook during the last debt ceiling impasse, in August
2011.

"It seems like what we saw from S&P just before the
downgrade, they were essentially warning us that the debt
ceiling standoff will not be tolerated and this is not in line
with a country that maintains an AAA credit rating. It's citing
these artificial default risks as the main reason ... They are
essentially saying get this done now," said Gennadiy Goldberg,
interest rate strategist at TD Securities in New York

Fitch reiterated that the delay in increasing the borrowing
capacity of the United States raises questions about the ability
of the United States to honor its obligations.

Moody's Investors Service rates U.S. government debt at Aaa
with a stable outlook.

The U.S. Treasury has said that on or about Oct. 17 the
government will reach its borrowing limit, thereby putting at
risk its ability to pay its bills.

Fitch is operating under the assumption that even if the
debt limit is not raised before or shortly after Oct 17, there
will be sufficient political will and capacity to ensure the
United States will honor its debts.

A Treasury spokesman said Fitch's decision is a reminder for
U.S. lawmakers that the United States is dangerously close to
defaulting on its obligations.

Negotiations between President Barack Obama and
congressional leaders cycled through a stop-start process again
on Tuesday, but no agreement was reached to reopen the
government and raise the debt ceiling.

Last week Fitch said that it would only consider the United
States in default if it failed to make payments due on interest
or principal of U.S. Treasuries.

"It lets investors know that this kind of risk is on the
horizon. We'll see what happens. I was hopeful earlier today
that sides were moving to an agreement, but now, I don't know,"
said John Carey, portfolio manager at Pioneer Investment
Management in Boston.

The warning came after the U.S. stock market closed for the
day, after a volatile trading session in which benchmark U.S.
equity indexes fell amid the political uncertainty.

In late New York trade, the U.S. dollar dropped to session
lows against the yen and trimmed earlier gains against the euro.

"This is not the way the dollar behaved during the Lehman
crisis or during the debt downgrade by the S&P in August 2011.
So we think yes, the more the U.S. credit rating is called into
question, the worse it will be for the U.S. dollar," said
Michael Woolfolk, senior currency strategist at BNY Mellon in
New York.

U.S. Treasury prices, already weak ahead of Fitch's
announcement, held their losses on the day.

"The United States has the absolute capacity to pay its
debt. This action is not about ability to pay. It is about
governance and willingness to pay. In that category the United
States has reached the brink of political failure," said David
Kotok, chairman and chief investment officer at Cumberland
Advisors in Sarasota, Florida.

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